When are guarantor loans useful?
There are several different circumstances that a guarantor loan might be useful. First, they can offer a practical solution to help people with bad credit to get a loan. If you have previously defaulted on a loan or had other financial issues like CCJs, it is not uncommon to have difficulty finding a lender. Although loan providers often get bad press for the charges they apply, it is always in their interest to find borrowers who can reliably make the repayments. They do not want people to take out unaffordable loans, and it is quicker and easier for them to deal with clients who promptly repay everything they owe. Therefore, if you have been unable to do this with previous loans, you may find that a lender is not willing to take the risk that you will reliably make the payments that you owe them. However, if you are genuinely in better financial circumstances and have the means and motivation to fully pay back your loan on time, this might be the time to establish whether a guarantor loan may work for you.
In some circumstances, taking out a loan with backing from a guarantor can also be a useful way to build up a credit history if you do not have any track record with credit at all. It can be a frustrating scenario to find yourself in, but some lenders will treat people with no credit history the same as people with bad credit history. This means that although you might never have had any financial problems, the lender cannot tell how reliable you would be when it comes to repaying the loan you are seeking. If you have a guarantor with a good credit history, a lender may be more willing to consider your application. The guarantor is effectively there as a safety net. You will make all the repayments and can gradually build yourself a good credit history by making the payments promptly.
Guarantor loans can also help people who may not be in a position to undertake full-time employment. A good example of this would be people who are in full-time study. As a student or mature student, you might still have significant financial responsibilities, but without any income coming in apart from student loans. If you are hit with an unexpected bill, you may, therefore, find it challenging to find a loan provider who is willing to lend to you because many will require you to have a regular salaried income. In these circumstances, getting a guarantor loan can present a good compromise as you can pay the loan off yourself, but the lender has the added assurance that your guarantor will step in should you be unable to pay.
Who can be a guarantor
The requirements for someone to be an appropriate guarantor are fairly straightforward. They must be 18 or older and be in full-time employment. Someone who is financially connected to you cannot act as a guarantor. This typically means that your spouse cannot act as a guarantor, nor can anyone with whom you share a bank account or any other financial product like a mortgage. However, it is quite common for people to ask a family member to be a guarantor. Parents or siblings are some of the most common applicants – although, of course, it is possible to ask a friend or colleague to act as a guarantor as long as you are both happy with the arrangements.
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The stages of applying for a guarantor loan
Although it might sound like a complicated process to get more people involved in a loan application, taking out a loan with a guarantor is actually very straightforward, there are a few simple stages that you need to understand.
1. Find a guarantor
There are certain eligibility criteria that your proposed guarantor will have to meet. Normally they will be expected to be in employment, and it may also be necessary for them to be a homeowner. It is quite common to ask family members to act as a guarantor. We recommend that you have a full and open discussion with them about how the loan will work. Having a guarantor is not a substitute for carrying out your own financial planning. You should never take out a loan in anticipation that you will not be able to afford it – that is not the purpose of a guarantor. Instead, they are there to reassure the lender that if there are unforeseen circumstances, the guarantor will be able to make the payments on your behalf. Whoever you ask to fulfil this role should feel comfortable that you can make the repayments before they agree to act as a guarantor.
During the application process, it is possible to change your guarantor at any time, as long as they meet the eligibility criteria. However, once your loan has been paid to you, it must be repaid in full before you can change your guarantor.
2. Understand the requirements of the loan
As with all loans, you must understand the interest rates and the terms of the loan. The interest rates on guarantor loans may still be reasonably high, so you must know what level of repayment you are expected to make each month.
You should have a clear idea of the APR (annual percentage rate) on the loan before you and your guarantor sign the documents. The APR refers to the total cost of borrowing for a year, which means it considers all of the fees and interest you have to pay. When you are initially applying for loans, you may see references to a ‘representative APR’. This is not necessarily the final rate they will charge you – it is a representative figure designed to help you fairly compare different providers. The figure you need to consider is the APR that you are offered on your agreement documentation.
So as an example, let’s say you borrow £2,000 over 2 years to help pay for some home improvements. If a lender offered you an APR of 40%, this would include the annual interest rate and any of the standard fees payable for the loan. You would then be required to make 24 monthly repayments of about £122.37, totalling £2,936.95. In total, this includes the £2,000 you borrowed and £936.95 in interest and fees.
3. Agree an amount
Although, as the borrower, you are taking primary responsibility for the payment of the loan, it’s important to share all the details with your guarantor and make sure they are comfortable with them. They should understand how much you are borrowing, what the monthly repayments are, how many repayments are due, and the total amount payable.
4. Ensure that your guarantor understands the arrangement
Your guarantor will be asked to sign legally binding documents, which means that the lender has the right to demand payment from them if you are unable to make the repayments. This is not something that should be taken lightly. By agreeing to this continued repayment authority, they are effectively taking on the burden of the debt in the event that you do not meet your financial obligations. So do think about how it may impact your future relationship with this person in the unlikely event that they were called upon to pay your debts.
5. Complete the application
Once you have an understanding and agreement with your guarantor, you can complete an application form telling the lender how much you are looking to borrow. They will also ask for some personal details such as your bank account information and will need some details about your guarantor.
At Cobra Payday Loans, we are an FCA authorised credit broker. This means that when you put in an application through our website, you can then just sit back and relax as we will match your application with the best possible lender. We only work with a selection of reputable and reliable lenders. Once your application is matched, we will send you all of the details to make the final arrangements.
6. Receiving the loan
Once all of the agreements are in place, you will receive the loan straight into your bank account. If you didn’t provide the full details of your bank account during the application, you might be asked to confirm these final details to allow the loan to be transferred to you. Because this all happens online, it is an easy and straightforward process, so you can expect the money to appear in your account quickly.
7. Making your monthly repayments
As with any loan, you will then have an agreed amount that you pay back each month. It is sensible to prioritise the repayment of debts above other spending. If you find yourself in the position of being unable to meet your monthly repayments, it is a good idea to talk to your guarantor as soon as possible. In the event that you miss the due date on a payment, the lender will typically contact your guarantor within 48 hours. It is always better for your guarantor to hear this directly from you so they are not caught by surprise when the lender contacts them.
If your guarantor makes one of the monthly repayments, you are still liable for future payments. However, if you find yourself repeatedly unable to make payments, your guarantor will be asked to make the repayment each time. This will continue until the loan is repaid in full.
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Changes in relationship with guarantor
Before you ask someone to act as a guarantor, it is important to think about the potential implications on your relationship with them. For example, a family member may feel obliged to help you by agreeing to act as a guarantor – however, do consider how they would react if you missed a payment and they were asked to step in. Would they be understanding? Would this change their relationship with you? It is important that you and your guarantor have a good relationship and that you can talk about finances openly.
In almost all cases, guarantor loans run smoothly. The borrower is perfectly able to manage their finances and make the repayments. The guarantor acts as a safety net but is never required to make any payments or have anything to do with the loan after signing the initial paperwork. However, in a small number of cases where borrowers find themselves unable to pay, the debt will be recovered from your guarantor. The strict affordability criteria put in place when a loan is agreed to means that there should not normally be any circumstances that mean a guarantor cannot afford to pay the debt. However, it is always worth having a frank discussion with your guarantor to check whether they would willingly do this. If you default on the loan, and your guarantor refuses to make the payments, they would be in breach of their contractual obligations.
If your guarantor themselves faces a significant change in circumstances that means they are unable to make a repayment when required, the lender would typically launch an investigation into why this has occurred. The lender may then be able to make a plan with the guarantor to find a manageable solution.
Using credit responsibly
If you regularly find yourself taking out short term loans because you are unable to meet your financial commitments, it is unlikely that taking out further loans is going to be a solution. If you find that you cannot pay off loans that you have committed to, you should always seek independent financial guidance.
Independent financial guidance services are there to be able to provide confidential guidance on financial matters. This will include guidance on managing debt and repaying loans. In addition, they will be able to provide helpful ideas on how best to manage your income to meet your financial commitments. Most importantly, they are independent, so they are not seeking to sell you any products or sign you up for any service. They are not working on commission, and they should not be getting a financial incentive to steer you in any particular direction when it comes to advising you on how to manage your loans.
It is worth noting that there is a separate category of independent financial advisors who will seek to point you in the direction of a product that best suits your needs. This may include consolidation loans or other financial products that can help you manage debt.
Where you can get support
There are several organisations that can help provide free financial guidance. One of the most popular is moneyhelper.org.uk and the not for profit organisation, nationaldebtline.org.
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